The EU regulation on the Carbon Border Adjustment Mechanism (CBAM) was signed by the co-legislators on 10 May 2023 and entered into force on 17 May, the day following publication in the EU official journal (for prior coverage, see the article in the April issue of Indirect Tax News). The CBAM itself will apply in two stages over a three-year period:
- A transition reporting requirement will apply to imports of certain carbon-intensive products as from 1 October 2023, but no CBAM certificates will have to be surrendered; and
- Full implementation of the measures will apply as from 1 January 2026.
CBAM is a climate measure that is part of the "Fit for 55" EU legislative package, which aims to reduce greenhouse gas emissions by 2030 and achieve climate neutrality within the EU by 2050, in line with the Paris Agreement. CBAM aims to discourage the use of carbon-intensive processes and incentivise manufacturers, within and outside the EU, to operate more sustainably using clean industrial production processes by imposing a charge on certain imported products for emissions released during those processes in the country from which the goods are exported.
The specific rules and requirements for the reporting of emissions will be further set out in an implementing act to be adopted by the European Commission after consulting the CBAM Committee. Initially, the CBAM will apply to direct greenhouse gas emissions resulting from the production process of specific covered goods. The Commission will then review how the CBAM is functioning and decide whether to expand it to more products and services and whether to include indirect emissions (i.e., carbon emissions from electricity used to produce goods).
The regulation applies to goods listed in Annex I, originating in a third country, when those goods, or processed products from the goods resulting from the inward processing procedure referred to in article 256 of Regulation (EU) No 952/2013, are imported into the EU. The high-CO2 emitting goods covered by the regulation are:
- Iron and steel
The regulation does not apply to:
- Goods from third countries/territories listed in point 1 of Annex III of the regulation (currently Iceland, Liechtenstein, Norway, Switzerland, Büsingen, Helgoland, Livigno, Ceuta and Melilla);
- Electricity from the third countries/territories listed in point 2 of Annex III (list to be defined);
- Goods listed in Annex I to the regulation that are imported into the EU where the intrinsic value of the goods does not exceed EUR 150 per consignment;
- Goods to be used or moved for military activities; and
- Goods in the personal luggage of travellers coming from a third country where the intrinsic value of the goods does not exceed EUR 150.
The European Commission may adopt implementing acts to regulate compliance, the information to be reported, as well as the means and format of reporting, and detailed rules on the calculation methods.
Operation of CBAM in practice
As from 1 January 2025, importers established in an EU member state will be required to submit an application via the CBAM registry (not yet set up) to qualify as an "authorised CBAM declarant" before importing goods into the EU. Alternatively, the importer may appoint an “indirect customs representative” (i.e., a person who acts in their own name but on behalf of the importer) that can submit the application and act as an authorised CBAM declarant. However, if the importer is not established in an EU member state, the indirect customs representative will have to submit the application.
The application will have to include:
- Basic information on the applicant (e.g., name, address, EORI number, its main economic activity carried out in the EU, etc.);
- Certification by the tax authorities in the applicant’s member state of establishment that it is not subject to any outstanding order for the recovery of tax debts;
- A declaration by the applicant that it has been in compliance with the customs and tax legislation for the previous five years;
- Evidence that the applicant has the financial and operating capacity to fulfil its obligations under the regulation;
- The estimated monetary value and volume of imported goods for the year in which the application is submitted and for the following calendar year; and
- Identification and contact information of the person(s) on behalf of the applicant is acting, if applicable.
Each authorised CBAM declarant will be assigned a CBAM account. Any changes to the information must be reported without delay, and applicants can withdraw their applications at any time. In the case of the import of electricity, where the transmission capacity for the importer is allocated through explicit capacity allocation, that person will be considered the authorised CBAM declarant in the member state where the person declared the import of electricity in the customs declaration.
As from 1 January 2026, only authorised CBAM declarants will be able to import covered goods into the EU.
The system defined by the regulation is based on "CBAM certificates," which will be issued in electronic format corresponding to one tonne of CO2 of embedded emissions in goods. As from 1 January 2026, authorised CBAM declarants will purchase from member states a number of CBAM certificates equal to the number of emissions embedded in the imported goods. These purchases will be made via a common central platform established and managed by the European Commission. The Commission will assign a unique identification number to each certificate and record the price and date of sale of the certificate in the CBAM registry in the account of the authorised CBAM declarant making the purchase.
Determination of embedded emissions
The determination of the actual embedded emissions specific to the goods produced in each installation will be made based on direct and, where appropriate, indirect emissions, within the system limits in relation to the quantity of goods produced in the reference period in a given installation. Emissions incorporated in input materials (precursors) will also be considered for complex goods.
Where actual emissions cannot be adequately measured, default values will be used. These values will be fixed at the average emission intensity of each exporting country and for each of the listed goods (other than electricity), to which a proportional increase would be added.
Details of the values to be considered will be contained in the implementing acts.
Pricing of CBAM certificates
The price of CBAM certificates will be calculated on the weekly average of the closing prices of the EU ETS (European Emissions Trading System) and expressed in Euro/tonne of CO2 emitted. The Commission will publish the average price on the first business day of the following calendar week and this price will be applied from the first day following publication.
CBAM declaration and surrender of CBAM certificates
Starting in 2027, an authorised CBAM declarant will have to declare by 31 May each year the embedded emissions in the relevant goods for the previous calendar year. The declaration will have to include the following information:
- Total quantity of each type of imported goods;
- Total embedded emissions;
- Total number of CBAM certificates to be surrendered, corresponding to the total embedded emissions; and
- Copies of verification reports, issued by accredited verifiers.
An authorised CBAM declarant will be allowed to claim in the CBAM declaration a reduction in the number of CBAM certificates to be surrendered to take into account the carbon price paid in the country of origin for the declared embedded emissions. Based on the result of the declaration, the authorised CBAM declarant will have to surrender the number of certificates that corresponds to the declared emissions.
The authorised CBAM declarant will need to ensure that the number of CBAM certificates in its CBAM registry account at the end of each quarter corresponds to at least 80% of the emissions incorporated in all goods imported from the beginning of the relevant calendar year. If excess certificates are purchased, the authorised CBAM declarant may require the competent authority of its member state to re-purchase up to a one-third of the total CBAM certificates purchased by the authorised CBAM declarant at a price equal to the price paid. The request to re-purchase certificates will have to be made by 30 June of each year. Certificates remaining in the authorised CBAM declarant’s account will be cancelled without compensation on 1 July.
The implementing regulation and its annexes contain more specific information on the content of the CBAM report and an initial explanation of the procedures for allocating direct and indirect emissions to goods produced in a specific installation. It is possible to consult the full mapping of CN codes to aggregated goods categories and special provisions for certain of them to determine production routes, system boundaries and relevant precursors.
From 1 October, importers will have to start collecting data on the embedded emissions of goods subject to the new regulations in order to complete the first report by the end of January 2024.
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